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Keeping your guarantee alive
Sally Bradshaw, International Company and Commercial Law Review, November 2006
Three recent English Court of Appeal cases emphasise the care that needs to be taken when varying the terms of guaranteed debt.
The basic rule in English law is that a guarantee is discharged if the guaranteed contract is amended without the consent of the guarantor, unless the amendment is self-evidently immaterial, or to the benefit of the guarantor1.
Three recent cases illustrated the continuing importance of the rule.
In one case2, a guaranteed loan agreement had been replaced and refinanced twice, including loans of new money for new purposes. The guarantee contained wording consenting in advance to amendments of the loan agreement. However, the Court held that the new loan agreements contained changes of a more extensive nature than were covered by the wording. The new loan agreements provided for the protection of the guarantee to continue and were signed by the guarantor in his capacity as a director of the borrower. However, since there was no separate consent from the guarantor personally, the guarantee was invalid.
In another case3, a guaranteed loan was varied to increase the amount advanced. The issue was whether the guarantors' liability increased accordingly. The guarantors countersigned the amendment agreement, but there was no express provision to extend the guarantors' liability. The court held that having the guarantors countersign the amendment agreement was sufficient to infer that they consented to an extension of their liability.
In the third case, a4 guarantee was discharged because the underlying contract had been amended without the guarantor's consent and the creditor failed to show that the amendment was immaterial. This case was interesting because the rule applied to discharge the guarantor's liability even though the document was not labelled as a guarantee - the court looked at the substance of the obligations in the contract.
The lessons:
- It is dangerous to rely on ‘consent in advance' wording for all but the most minor amendments.
- The most prudent course is to get explicit consent to any variation from the guarantor in its capacity as guarantor.
1 Holme v Brunskill (1878) 3 QBD 495
2 Triodos Bank NV v Dobbs [2005] EWCA Civ 630
3 Moat Financial Services v Wilkinson [2005] EWCA 1253
4 Marubeni Hong Kong and South China Ltd v The Mongolian Government [2005] EWCA CIV 395
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For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.
Disclaimer
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
